Competing with non-competes

A typical non-competition agreement (“non-compete”) in an employment context prohibits an employee from working for a business similar to his or her employer upon an employee’s departure, whether fired or not. A non-compete is not the same as a non-solicitation agreement (“non-solicit”), which is generally an agreement that an employee won’t approach and encourage other employees to leave for a new job and/or won’t approach a former employer’s clients for business. When it comes to non-competes, the presumption is that these are unenforceable because they are seen to be in restraint of trade and contrary to public policy. [1], [2] So if non-competes are presumed unenforceable, are they ever enforceable?

To enforce a non-compete, an employer must show that the non-compete is necessary to protect the employer’s legitimate business interests and that it is reasonable. In practice this usually means that non-competes may be enforced where an employee is seen to be the face of the business to its customers, such that customers would follow the employee to a competitor even if not solicited directly. But what is the actual legal test?

Enforcing non-competes: a three-prong test [3]

Prong 1: Strong prima facie case and reasonable

To satisfy the first part of the test, an employer must establish a strong prima facie case and show that the non-compete is reasonable. Generally, a strong prima facie case is made out where the employee plays a key role in the business (a “key employee”) or has earmarks of a fiduciary.[4] A key employee is someone whose position and responsibilities are essential to the running of the business, thereby making the employer particularly vulnerable to competition upon that employee's departure.[5] An employee may be found to be a key employee if he or she has:

- knowledge of names of customers and/or contact persons and/or the needs of clients;

- access to the employer's special or confidential information;

- the names of suppliers;

- knowledge of pricing and/or the authority to provide special pricing arrangements or other special information to clients; or

- other duties and responsibilities which show them to be a key person to the corporation.

To establish that a non-compete is reasonable, an employer must show the following:

(a) the non-compete protects a legitimate proprietary interest of the employer;

(b) the restraint is reasonable between the parties in terms of:

(i) temporal length;

(ii) spatial area covered;

(iii) nature of activities prohibited; and

(iv) overall fairness;

(c) the terms of the restraint are clear, certain and not vague; and

(d) the restraint is reasonable in terms of the public interest.[6]

Prong 2: irreparable harm

In addition to the first prong of the test, the employer must show irreparable harm will result if the non-compete is not enforced such that the harm caused cannot be quantified or cured by damages or money.

Part 3: balance of convenience

Finally, the employer must show that the harm to the employer if the non-compete is not enforced is greater than the harm to the former employee if the non-compete is enforced.[7]

Non-competes can’t compete (with non-solicits)

With the above in mind, it’s easy to see why non-competes in the context of employment are, save in exceptional circumstances, almost impossible to enforce and generally, the court won’t enforce a non-compete if a non-solicit would adequately protect an employer’s proprietary interests.[8] However, this does not mean that non-solicits don’t have their own enforcement issues. Non-solicits that are overly broad may be unenforceable, such as prohibiting an employee from soliciting “any” customers or prospective customers of a former employer, including those with whom an employee had no business dealings during the course of his or her employment.[9] The central question is: are the provisions of the non-solicit broader than what is necessary to protect the legitimate proprietary interests of the business? If the answer is yes, the non-solicit may be seen as an unreasonable restraint on trade and, thus, unenforceable.[10]

Obviously, enforcing non-competes and non-solicits can be costly and time consuming. If a non-competition and/or non-solicitation agreement is important to your business, it’s vital to ensure this is drafted clearly and not broader than what’s required to protect your legitimate business interests. Further, for both the employee and the employer, it is sensible to ensure that an employee understand what they are agreeing to by obtaining independent legal advice before signing an agreement.

Alisa Bell

[1] In the context of commercial law, the presumption is that non-competes are enforceable, unless it can be established that it is unreasonable.

[2] a U.S. study showed that between 1975 and 2005, states that enforced non-competes versus states that did not enforce these, suffered brain drain among patenting inventors. See: “Regional Disadvantage? Non-Compete Agreements and Brain Drain,” July 7, 2011. Matt Marx, Jasjit Singh and Lee Fleming.

[3] RJR MacDonald Inc. v. Canada (AG) [1994] 1 SCR 311

[4] Altam Holdings Ltd. v. Lazette [2009] ABQB at para 107

[5] Gastops Ltd. v. Forsyth ONSC 2009At para 82.

[6] Elsley v. J.G. Collins Ins. Agencies, [1978] 2 SCR 916

[7] Yellow Pages Group v. Anderson Co. (2006) BCSC 518 at para 14

[8] Elsley, supra at para 33.

[9] Phoenix Restoration Ltd. v. Brownlee, 2010 BCSC 1749.

[10] F&G Delivery Ltd. v. Mackenzie, 2010 BCSC 195